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Secured Personal Loans & Unsecured Personal Loans

November 15, 2024

By Sarah Sumner

Secured Personal Loans & Unsecured Personal Loans: How Are They Different?

A personal loan may be a good choice when you want to make a large purchase like new furniture or a car, or even for smaller amounts like when you need additional funds to bridge a financial gap. There are several kinds of loans, but they generally can be categorized as secured loans or unsecured loans. Let’s get into the financial details!

What Is a Secured Loan?

A secured loan is secured by collateral. Because there is collateral securing the loan, a borrower may qualify to borrow more money. An example of a secure personal loan is an auto loan.

What Is an Unsecured Loan?

An unsecured loan has no collateral and is sometimes called a signature loan. The approval is based primarily on the borrower’s ability to repay and creditworthiness. An installment loan is an example of an unsecured loan.

Collateral and Equity

When it comes to secured loans, two keywords stand out: collateral and equity.

Collateral is something of value that a borrower owns or has interest in that they can use to secure their loan. If the loan is not repaid as agreed, the lender has the right to repossess the collateral as payment for the debt.

Equity is the value of your collateral MINUS how much you owe on it. So, if your car is worth $7000 and you owe $5000, you have $2000 worth of equity.

Which Loan Is Right for You?

That’s a question you’ll have to answer through a detailed discussion with your chosen loan company. Ask as many questions as you need to get a firm understanding of what is right for you in your financial situation. You’re a few steps ahead in the loan game by learning about secured and unsecured loans. So, use it to your advantage!

This information is presented for educational purposes only. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

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